Business

6 Rules to Live by When Starting a Subscription Business

Alex Zhardanovsky is an evangelist for subscription-based businesses, as he co-founded PetFlow.com, an online service that ships kibble and pet toys to consumers' doors. Just three years after its debut, the company is expected to pull in $50 million in sales in 2014.

But as gung ho as he is, Zhardanovsky sees that this model isn't for everyone.

He dismissed an idea that someone pitched him recently for a subscription-based sock-of-the-month club, for instance, saying, "How many pairs of socks does a guy really need? Once I get a few months’ worth, I'll cancel, and that’s not a good subscription model."

That said, Zhardanovsky and others in the marketing industry see broad and lasting potential in an emerging subscription economy that’s so far dominated by companies like Netflix, Birchbox, Amazon Prime, Dollar Shave Club and Spotify. Even retail behemoth Walmart has planted its flag, with a food-and-treats-based subscription service, and H. Bloom does big business by consistently decorating spas, hotels and office buildings with fresh flowers.

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Zhardanovsky has called subscription services "the holy grail" of businesses because "you can acquire a customer once and potentially keep him for life as long as you provide a service or product that he wants and values."

Consumers will lock themselves into a monthly subscription to get the best a company has to offer, with convenience, access, reliability and selection being among the strongest selling points. Businesses, meanwhile, will be laser focused on keeping those customers happy because they want the positive cash flow, higher profit margins and peace of mind that come with loyalists who pay upfront.

It’s not quite as easy as some of the successful companies may make it look, though. Their enthusiasm aside, experts say there are a number of guidelines to follow if a small business wants to become a subscription service.

1. Be unique

Give consumers a product or service they can’t get anywhere else, whether it’s Standard Cocoa’s curated artisanal chocolates from around the world or Forrester Research’s latest data analysis and market forecasts.

NatureBox sends its customers private-label healthy snacks in custom-created packages each month, without a Clif Bar, Kashi product or anything else that could come from the corner deli or a neighborhood grocery store.

And if you have head-to-head competitors, it’s not a bad idea to point out the differences in your two offerings, says Zach Bulygo, a writer for KISSmetrics.

"It can be in your headline, on your home page, close to your call to action," Bulygo says. “Make it clear that you’re different.”

2. Be convenient

Every step of the process must be simple for the consumer, from signing up to placing orders to making returns. Netflix focuses on its all-you-can-eat, order anytime service, while Trunk Club emphasizes the hassle you’ll avoid if you skip the mall and use their virtual personal stylists to build your wardrobe.

Allow consumers to easily manage their subscription so they don’t run out of their necessities, saving them last-minute retail runs.

3. Be quirky

It’s no secret that Dollar Shave Club sells a commodity — men’s razors and shaving products — but the brand has also created a hip, almost party-like brand identity, experts said. It’s not that those consumers couldn’t pick up their Gillettes at Target, but they choose not to, instead paying to join the cool kids’ club.

New Master’s Academy, a Southern California-based school, offers subscription-based online classes in artistic endeavors like drawing, painting and sculpture. There’s more than 100 hours of content for budding Picassos to study at a price that no community college could beat.

4. Be valuable

When do most people realize they’re out of dog food? When the bag’s empty, Zhardanovsky says. That’s why PetFlow closely monitors its food manufacturers, making sure to have in stock what its customers need by their scheduled delivery dates. The company sends email alerts to its members one week prior to delivery. "You want to feel like the company is looking out for you as a consumer," he said. "That’s a big value-add."

PetFlow customers, who don’t pay a subscription fee in addition to their product orders, can control their deliveries and change schedules as often as they like.

5. Be adventurous

Image: Birchbox

A service like Birchbox, which sends samples of beauty products, is like a treasure hunt in the mail every month, experts said. The more than 20,000 women who subscribe often cite the sense of delight and discovery they get from having a new product before it’s widely available. For that, they’re willing to pay $10 a month.

Half of those customers have bought full-sized products of the samples they tried, a massive conversion rate, John Warrillow, president of SellabilityScore.com and writer of an upcoming book on the subject, said.

6. Be insider

From the FastPass at Disney World to special clearance at the airport, "We’ve become perpetual queue jumpers," Warrillow said. That’s why front-of-the-line, early access subscription services may become one of the most fertile niches in this new economy.

TheRealReal.com, founded by former Pets.com executive Julie Wainwright, offers sneak peeks on its sales of luxury goods to its premium members. Zhardanovsky said he thinks traditional brick-and-mortar retailers should do the same, though some already give their cardholders special treatment.

He and many other consumers would be willing to pay a subscription fee, he said, to get an early look at sales before the merchandise is picked over and popular sizes are gone.

Though it’s a service and not a product, a subscription-model company called Thriveworks cuts through red tape and matches consumers with counselors and life coaches. You, as a member, go to the front of the line, waiting no more than 24 hours for an appointment. Expect to see more health care professionals adopt a concierge-style of service, experts say.

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